123s of Private Equity in GI

May 15, 2023

As we have previously noted, private equity (PE) firms have been increasingly drawn to the health care sector as a profitable investment opportunity. PE is a type of investment that involves pooling funds from investors in order to acquire companies with a goal of improving their financial performance to then sell them for a profit. One recent area of interest for PE firms has been gastroenterology, the branch of medicine that focuses on the digestive system and its disorders. Private equity firms are attracted to this field due to the steady demand for gastrointestinal (GI) services, which are required by patients of all ages and demographics. Additionally, the complexity of GI treatments and procedures creates a high barrier to entry for competitors, making it an attractive area for investors seeking long-term growth potential.

Why Is Private Equity Interested in GI?

Private equity is interested in gastroenterology due to several factors that make it an attractive investment opportunity. These include:

  • Steady demand: GI disorders affect a large portion of the population, and demand for GI services remains steady regardless of economic conditions or market volatility.
  • High barriers to entry: The complexity of GI treatments and procedures creates a high barrier to entry for competitors, making it an attractive area for investors seeking long-term growth potential.
  • Growth potential: The aging population, increasing rates of GI disorders, and advances in medical technology and treatments are expected to drive growth in the GI market in the coming years.
  • Favorable reimbursement environment: The reimbursement rates for GI procedures and services is relatively stable, providing a steady revenue stream for investors.
  • Fragmented market: The gastroenterology market is highly fragmented, with many small practices and clinics, presenting opportunities for consolidation and operational efficiency improvements through mergers and acquisitions.

How Does a Private Equity Firm Become Involved in GI?

PE firms can get involved with the GI sector in several ways, including:

  • Acquiring existing GI practices: PE firms can acquire existing GI practices to consolidate and create larger entities. This allows for economies of scale and operational improvements, resulting in improved financial performance.
  • Investing in GI-related services: PE firms can invest in companies that provide services related to GI care, such as diagnostic services, medical devices, and pharmaceuticals.
  • Partnering with GI physicians: PE firms can partner with GI physicians to create new practices or to expand existing practices. This can involve providing capital for expansion or partnering with physicians to acquire other practices.

In each of these cases, the PE firm typically provides the capital necessary to fund the investment, and then works with the management team to improve operations and financial performance.

Pros and Cons to Private Equity Investment to GI

There are several potential pros and cons to PE firms getting involved with a GI practice.

Pros to Private Equity Investment in GI:

  • Access to capital: PE firms can provide the capital needed to fund growth and expansion of the GI practice, which can enable the practice to invest in new technology, open new locations, or offer new services.
  • Operational improvements: PE firms often have significant experience in improving operational efficiency and can bring expertise to the GI practice to improve profitability and patient care.
  • Consolidation: PE firms can help consolidate smaller GI practices to create larger entities with greater scale and operational efficiencies.
  • Increased valuations: The involvement of a PE firm can increase the valuation of the GI practice, potentially leading to a higher sale price in the future.

Cons to Private Equity Investment in GI:

  • Short-term focus: PE firms often have a short-term focus on generating returns (usually 4-7 years), which can create pressure to prioritize profitability over patient care.
  • Potential conflicts of interest: The involvement of a PE firm can create conflicts of interest between the PE firm and the physicians in the practice, particularly if the PE firm has a different vision for the future of the practice.
  • Increased debt: PE firms often use debt financing to fund investments, which can increase the debt burden on the GI practice.
  • Loss of autonomy: The involvement of a PE firm can result in a loss of autonomy for the physicians in the practice, particularly if the PE firm takes a more active role in management.
  • Reimbursement pressure: PE firms may put pressure on the GI practice to increase profitability, which can lead to a focus on high-reimbursement procedures rather than patient care.

The involvement of a PE firm in a GI practice can bring both benefits and challenges. The key is for the physicians and the PE firm to have a shared vision for the future of the practice and to work together to balance the interests of all stakeholders, including patients, physicians, and investors.

There are both legal and non-legal considerations that practice owners should take into account when deciding whether or not to partner with PE. Among the non-legal considerations are:

  • Cultural fit: It’s important to consider whether the values and culture of the PE firm align with those of the GI practice. A strong cultural fit can lead to a more successful partnership and better patient care.
  • Management expertise: It’s important to assess the management expertise of the PE firm and to determine whether they have a proven track record of successfully managing health care practices.
  • Reputation: The reputation of the PE firm should be evaluated to ensure that they have a history of ethical business practices and a positive reputation in the health care industry.
  • Impact on employees: The impact of the partnership on employees should be considered, including the potential for changes in compensation, benefits, and job duties.

Legal considerations that practice owners should consider include:

  • Governance structure: The governance structure of the partnership should be carefully considered to ensure that the interests of all parties are aligned and that the physicians maintain control over clinical decision-making.
  • Exit strategy: It’s important to consider the exit strategy for the partnership, including the length of the partnership and the options for buyout or sale.
  • Regulatory compliance: The GI practice should ensure that the partnership complies with all applicable regulatory requirements, including those related to patient privacy, fraud and abuse, and anti-kickback laws.
  • Legal and financial due diligence: The GI practice should conduct thorough legal and financial due diligence on the PE firm to ensure that the partnership is financially viable and legally sound.

Partnering with a private equity firm can bring significant benefits, but it’s important for practice owners to carefully consider all the potential advantages and challenges before making a decision.

Importance of Outside Legal Counsel

Partnering with a private equity firm can be a complex and high-stakes process, and having outside legal counsel can provide expertise and guidance throughout the process. Legal counsel can conduct due diligence and help the practice understand any potential risks associated with the partnership. An experienced health care attorney can also help negotiate favorable terms and protect the interests of the GI practice. This includes ensuring that the partnership agreement reflects the goals and priorities of the practice, and that the agreement includes appropriate protections for the physicians and patients. Additionally, having outside legal counsel can help with regulatory compliance by ensuring the partnership complies with relevant laws and regulations.

Contact ByrdAdatto

At ByrdAdatto we have the experience and expertise to guide gastroenterologists through this complex process. If you are a gastroenterologist interested in a private equity association or are considering employment with an equity-backed group, contact us at info@byrdadatto.com to schedule a consultation.

We are grateful for the significant research and drafting contribution to this article from our Law Clerk, Clint Nuckolls. Clint is a second-year student at SMU Dedman School of Law.

ByrdAdatto founding partner Michael Byrd

Michael S. Byrd

As the son of a doctor and entrepreneur, ByrdAdatto attorney Michael S. Byrd has a personal connection to both business and medicine.

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